Restated Financial Statements and Auditor Litigation

This study provides evidence on the restatement circumstances associated with lawsuits against auditors. We examine restatements of financial statements previously issued to the public and filed with the SEC by 416 US companies that announced restatements from 1995 to mid-1999. Our examination focuses on the accounting issues giving rise to restatements. We classify these issues as either economic or technical. Economic restatements involve transactions and accounts related to core (recurring) earnings; all other restatements are technical. We find that auditors are significantly more likely to be sued over economic restatements than technical ones. Additionally, we find that revenue restatements, one type of economic restatement and overall the most frequent, primarily contribute to this result. While economic restatements are associated with more severe circumstances as measured by fraud, materiality, bankruptcy/delisting, and security price reaction, our multivariate model includes these as control variables